Oil's record jump defies single explanation

Oil's record jump to $139 (71 pounds) a barrel at the end of last week defies any single explanation, although some leading analysts and producers predict the price could yet go higher. China National Offshore Oil Corporation's (CNOOC) oil rig in China's Bohai Sea is seen in...
REUTERS

LONDON Oil's record jump to $139 (71 pounds) a barrel at the end of last week defies any single explanation, although some leading analysts and producers predict the price could yet go higher.

Crude jumped $10.75 on Friday to $139.12, taking two-day gains to more than $16. Some put the move down to comments by an Israeli minister about a possible attack on Iran, the world's fourth-largest producer.

Others cited strong oil market fundamentals.

"There is a strong fundamental baseline to all of this," said Kevin Norrish, oil analyst at Barclays Capital. "On top of that, Iran has come back onto people's radar screens."

Iran's dispute with the West over Tehran's nuclear work had until last week faded in importance to oil investors, although the comments from Israel's transport minister Shaul Mofaz sparked a scramble to buy.

Banks such as Goldman Sachs and Barclays are prominent among those saying oil market fundamentals are a key factor in rising prices. Producers, including OPEC, tend to blame factors other than supply, such as speculation.

Citigroup, in a note on Monday, said the broader themes behind oil's latest jump were probably disappointing growth in supply and robust world demand, and prices could rally even further.

World demand, while crimped by record prices, is still expected to rise by about 1 million barrels per day (bpd) this year, while supply from producers outside OPEC is at risk of posting no growth, the bank said.

"Until clear evidence emerges that demand is moving towards negative territory in absolute terms, a break of the bull run in oil is unlikely," the bank said.

MARKET MANIA?

For some, oil's jump last week defies explanation and is comparable to financial market bubbles of the past, such as the 1990s dot-com boom.

"If anyone tries to spin a rational explanation as to what transpired last Thursday and Friday in the energy complex, then just tune them out or better yet, punch them in the nose," analysts The Schork Report said.

That aside, others in the market pointed to a renewed bout of dollar weakness for fuelling last week's price jump.

European Central Bank President Jean-Claude Trichet signalled a possible interest rate hike later this year, pushing the single European currency higher against the dollar and sparking oil's latest surge.

Still, those comments could prove bearish for oil should they lead to rate increases by the U.S. Federal Reserve and other central banks, argued John Kemp, economist at RBS Sempra.

"It is far from clear that the confluence of events last week was really bullish for the oil market at all," he said.

The weakness of the U.S. currency has been a major factor behind this year's commodity price gains as dollar-denominated raw materials offer a potential hedge against inflation.

Other explanations for the rally emphasised fundamentals.

According to the International Energy Agency, the lack of a rise in oil inventories in the second quarter -- a time when they usually rise -- and concern about Iran were reasons behind Friday's price jump.

"I think as a result of that we saw a surge of a combination of risk management buying and a reluctance to sell," said Lawrence Eagles, head of the Oil Industry and Markets Division at the Paris-based IEA.

But many oil producers, including the Organization of the Petroleum Exporting Countries and some of the world's largest fully publicly traded oil firms, say supply is enough and blame speculation for rising prices.

OPEC officials have lined up to say the exporter group does not need to pump more and Jeroen van der Veer, head of Royal Dutch Shell Plc, has blamed market "psychology," not shortages, for record prices.

While they cite different reasons for oil's rally than investment banks such as Citigroup and Goldman, some OPEC officials also predict that oil will rally even higher.

"I forecast that by the end of summer the price of oil will reach $150," a senior Iranian oil official, Mohammad Ali Khatibi, was quoted on Sunday as saying.

Next In Stocks & Shares News

BERLIN The resounding "no" from Italian voters to Prime Minister Matteo Renzi's referendum on constitutional reform was not a rejection of the European Union and its single currency, as jubilant populists from across the bloc claimed on Monday.

WASHINGTON Change at the Federal Reserve could come quickly with President-elect Donald Trump's team pledging to promptly fill high-level central bank jobs and roll out a tax and fiscal plan that could rewrite policymakers' core economic assumptions.

NEW YORK Oil's blistering rally of up to 10 percent to $50 a barrel on Wednesday should continue into next week, analysts and fund managers said, after the world's top producers announced a historic deal to rein in output.

Trending Stories

Sponsored Topics

Reuters is the news and media division of Thomson Reuters. Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Learn more about Thomson Reuters products: